FSA Proposes Changes to UK Listing Rules
Christopher Bernard | Bloomberg Law
The UK Financial Services Authority (FSA) has published a consultation paper proposing amendments to the UK Listing Authority (UKLA) Listing Rules (LR) that are intended to reflect changes in market practices. The consultation covers a range of topics including the treatment of reverse takeovers and certain other transactions, the responsibilities of sponsors, the financial information required for premium listings, and new rules for “externally managed companies.” The FSA also acknowledges recent debates regarding the premium listing regime and invites suggestions on how the regime can be improved to strengthen investor protections.
In addition, the FSA is proposing to incorporate material from other sources such as its Technical Notes1 into the Listing Rules. This should provide for ease of reference and avoid confusion by ensuring that all relevant guidance is available in one place.
Currently, when an issuer undertakes a reverse takeover, its shares are delisted and the enlarged group must prepare a new prospectus and satisfy the eligibility requirements for listing. In some cases, however, the issuer is exempted from these requirements. The consultation paper seeks to clarify which transactions should be subject to the reverse takeover regime, while ensuring that the applicable rules are proportionate and clear and reflect current practice.
The proposals are intended to prevent reverse takeovers from being used as a “back-door” route to listing by companies that do not meet the eligibility requirements. Currently, an acquisition of one listed company by another is not treated as a reverse takeover. The FSA proposes to narrow this exemption so that only acquisitions of a listed issuer by another listed issuer in the same listing category will avoid being treated as a reverse takeover.
Where the reverse takeover regime does apply, the FSA proposes to make its provisions more proportionate. For example, the FSA proposes to reduce the information requirements that must be met in order to avoid a suspension and to reduce the financial information eligibility requirements after a listing is cancelled.
— Consolidation and Codification
Requirements relating to reverse takeovers, including those provided in a 2010 Technical Note, would be consolidated in the Listing Rules, and several current practices would be codified.
The FSA is also proposing changes to clarify the requirements of sponsors acting for premium listed companies. Sponsors are responsible for ensuring that companies understand the regulatory framework of a premium listing and for providing the UKLA with assurance that issuers are complying with their obligations. The FSA believes that the Listing Rules should clearly set out scope and nature of the sponsor’s role and enable the UKLA to monitor and supervise sponsors effectively.
The FSA proposes to amend LR 8.2.1R to clarify that a sponsor would be deemed to be providing a “sponsor service” whenever they are obliged to provide a key confirmation or assurance to the FSA. Sponsors would also be required to be appointed for additional services, including providing confirmations that related party transactions are fair and reasonable as well as appointments required by the proposed new reverse takeover rules. In addition, all communications between a sponsor and the FSA in connection with the sponsor services would be considered to fall within the definition of sponsor services and therefore subject to the Principles for Sponsors set out in LR 8.
— Roles and Responsibilities
With regard to the roles and responsibilities of sponsors, the FSA is proposing four key changes:
- Currently, sponsors provide information, opinions, and explanations voluntarily to the FSA. The FSA proposes requiring sponsors to provide the FSA with any explanation or confirmation that the FSA reasonably requires to ensure that a company is complying with the Listing Rules.
- A sponsor would be required to take reasonable steps to ensure that the information it provides to the FSA is “to the best of its knowledge and belief accurate and complete in all material respects.” Sponsors would also be required to update information to reflect material changes.
- Sponsors would be subject to a new Principle requiring them to act with honesty and integrity in relation to sponsor services. Authorised persons are already subject to a “principle of integrity” under the FSA’s Principles for Businesses.2
- A sponsor would also be required to take all reasonable steps to identify conflicts of interest that could adversely affect its ability to carry out its responsibilities under LR 8.
— Document Retention
The consultation paper includes new rules that would: (1) require sponsors to retain accessible records to demonstrate the basis on which their services have been provided; and (2) provide guidance on what the FSA would expect to see in effective record management systems.
— Notification Requirements
The FSA is proposing to amend the existing notification requirements so that sponsors would be obliged to notify the FSA of a wider range of developments. This would include information that would be relevant to the FSA in determining whether the sponsor has complied with its eligibility requirements, as well as information that the sponsor reasonably believes could impact market confidence in the sponsor regime.
— Issuer Responsibilities
The Listing Rules would also be amended so that issuers and applicants would be specifically required to co-operate with their sponsor to enable it to carry out its obligations to the FSA.
With regard to the financial information that companies must provide when seeking a premium listing or that premium listed companies must include in shareholder circulars, the FSA is proposing to amend the Listing Rules to reflect existing market practice, some of which is covered in the Technical Notes. The FSA has also made a number of additional proposals, including:
- Clarifying the application of LR 6.1 with regard to the track record requirements that an company must meet in order to be eligible for a premium listing;
- Providing detailed requirements for the disclosure of financial information with regard to class 1 transactions and disposals of interests in unconsolidated holdings;
- Increasing disclosure requirements for figures relating to synergy benefits; and
- Enabling targets that are admitted to certain multilateral trading facilities (MTFs) and investment exchanges to comply with reduced information requirements, provided that the FSA is satisfied with the accounting standards and other standards of the MTF or exchange.
The FSA has proposed a number of changes with regard to various types of transactions, most of which codify existing practice and have been addressed in the Technical Notes. The key changes include:
- Requiring companies to provide supplementary circulars reflecting significant developments if necessary for shareholders to make informed decisions on matters requiring their vote;
- Clarifying the FSA’s approach to break fees and focusing on the purpose of an arrangement in determining whether it should be treated as a break fee arrangement; and
- Removing the notification requirements for class 3 transactions and relying on announcements of price-sensitive information under the Disclosure and Transparency Rules (DTR) at DTR 2 instead.
Externally Managed Companies
The FSA notes the recent development of what it refers to as “externally managed companies” that have listed in the UK. These special purpose acquisition companies (SPACs) are essentially cash shells incorporated for the purpose of acquiring, managing, and transforming target companies to create value. Significant management functions are outsourced to offshore advisory firms.
Even though only a few of these companies currently exist, the FSA is concerned that more listed companies may adopt this structure, which will make it more difficult for shareholders to hold management accountable. Since management functions are performed by the offshore advisory firm, they are not subject to the shareholder protections afforded by the UK listing regime. The FSA therefore believes that these companies should not be eligible for a premium listing.
The FSA is proposing two principle changes to the Prospectus Rules (PR), the Disclosure and Transparency Rules, and the Listing Rules to address these concerns:
- The principals of the advisory firm would be: (1) responsible for any prospectus published by the listed company pursuant to PR 5.5; and (2) subject to the requirements of DTR 3.1 to disclose share dealings in the listed company’s shares.
- LR 6.1 would be amended to provide that externally managed companies are not eligible for premium listing. Instead, companies can adopt a traditional corporate structure or can move to a standard listing or to an unregulated market such as AIM.
The consultation paper acknowledges that the quality of the premium listing standard has been the subject of recent debate, including concerns regarding the free float of foreign companies and the effectiveness of governance arrangements. A number of stakeholders have stated publicly that the free float requirements should be used to ensure effective corporate governance arrangements and protect minority investors. Some investors, who are required by the terms of their investment mandates to purchase shares that are included on FTSE indices, have raised similar concerns regarding non-UK issuers.
The FSA notes that the free float requirements in the Listing Rules are derived from Article 48 of the Consolidated Admissions and Reporting Directive3 and are intended to address issues of liquidity rather than governance. It is therefore not appropriate for the FSA to use the rules to determine whether a specific issuer is suitable for listing. The FSA also points out that the UK Corporate Governance Code, which is the source of governance standards for listed issuers, is the responsibility of the Financial Reporting Council. With regard to the FTSE indices, the FSA maintains that it is up to FTSE International Limited and not the regulator to determine the criteria for inclusion.4
Nevertheless, the FSA is seeking feedback on whether the premium listing regime should be enhanced in order to strengthen investor protections. By way of example, the FSA considers whether:
- To give minority investors a right of veto over important resolutions such as the election of directors;
- To reinstate the requirement that companies be able to demonstrate their independence from controlling shareholders as a condition to listing;
- To introduce a free float requirement that would enable minority shareholders to determine the company’s governance arrangements; and
- To strengthen related party transaction requirements and disclosures.
The consultation period will close on 26 April. With respect to all issues other than changes to the premium listing regime, the FSA intends to publish the responses with a policy statement in the summer and to implement rules soon thereafter. The FSA will consider the responses to its consultation on premium listing with a view to developing specific options or proposals for a paper to be published later in the year.
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